Author: Laxmi Mishra BA LLB, Final Year Delhi Metropolitan Education affiliated to GGSIPU
Green Finance in a Greying World: Banking on Sustainability or Branding CSR?
Abstract
Green banking is gathering pace in the financial sector as a measure towards the protection of the environment. The pertinent question now is: is green banking a legal obligation or merely a voluntary Corporate Social Responsibility (CSR) effort? This article examines the notion of green banking, its connection to environmental law, and whether the existing framework views it as an enforceable obligation or a malleable fad.
To the Point
The escalating danger of climate change, loss of biodiversity, water and air pollution, and weather-related disasters have compelled the international community to rethink the economic and industrial paradigms. While industries such as manufacturing, energy, and transport have been under the environmental scanner all along, the contribution of the financial sector, particularly banks, towards environmental sustainability has gained prominence only in the past two decades. This change has given birth to and shaped a notion called “Green Banking.”
Green banking is defined as banking operations that promote and enhance environmentally friendly and socially acceptable investments. It includes incorporating environmentally friendly internal operations (such as becoming paperless or adopting renewable power in offices) and advancing green development through financial choices — such as lending to green energy initiatives, refusing financing to dirty industries, or creating green bonds. Essentially, green banking tries to bring the objectives of environmental conservation and economic development together via the banking route.
Banks by definition are middlemen between capital suppliers (depositors) and capital takers (borrowers). This places them in an enormous amount of power to decide which companies thrive and which do not. If a bank does not support a business that devastates the environment, it is contributing to environmental conservation indirectly. When banks decide to invest in solar power, electric cars, or organic farming, they are actively encouraging sustainability. Therefore, banks can be mighty drivers of change, pushing the economy towards greener horizons.
In India, the concept of green banking is in a nascent stage. Some public sector and private sector banks have introduced green initiatives – like paperless banking applications, green branches, and renewable energy lending. More significantly, they also pose a crucial question: are such green initiatives being taken up because the law compels them to, or because banks wish to do better for their image and assume voluntary Corporate Social Responsibility (CSR) commitments?
This difference is important because if environmental responsibility is just dealt with as a CSR initiative, it will always be discretionary and at the mercy of individual institutions. However, if it is dealt with as a legal mandate, it becomes enforceable, predictable, and effective on a national level.
The Indian legal framework has a robust foundation of environmental legislation, and the Constitution itself — through Article 48-A and Article 51A(g) — encourages conservation of the environment. But these pieces of legislation are aimed mostly at industries and not financial institutions. This creates a vacuum in legislation in terms of attaching environmental responsibility to financial institutions.
Meanwhile, India’s Companies Act, 2013, and several guidelines from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) urge listed firms and banks to embrace eco-friendly policies. But the success of these guidelines relies primarily on how they are interpreted and implemented — whether as legally enforceable rules or as wide, flexible guidelines. In the era of climate emergency, to ascertain the status of green banking — as a legally mandated obligation or CSR-influenced fad — is more than an abstract thought. It is a prerequisite for creating a sustainable financial system responsive to national and international environmental aspirations.
Legal Jargon
- Constitutional Mandate: Although the Indian Constitution does not set out environmental obligations per Se for financial institutions, it establishes a broad framework for environmental governance:
According to the Article 48-A of the DPSP, that it is state responsibility to protect and improve the environment and to preserve the forests and wildlife of the country. All residents have a responsibility to safeguard and conserve the natural environment, which includes woods, lakes, rivers, and wildlife, according to Article 51-A(g) (FR).
- Environmental Legislation
India’s environmental legislation, such as:
- The Environment (Protection) Act, 1986
- The Air (Prevention and Control of Pollution) Act, 1981
- The Water (Prevention and Control of Pollution) Act, 1974
- The Forest Conservation Act, 1980, are mostly concerned with controlling industrial units, generation of waste, emissions, and exploitation of natural resources. The above legislation does not directly place obligations on financial institutions for the environmental sustainability of projects financed by them.
- Banking Regulatory Framework
RBI Circulars and Guidelines: In 2007, the Reserve Bank of India (RBI) released circulars on Corporate Social Responsibility (CSR), sustainable development, and non-financial reporting, urging banks to include environmental considerations.
In July 2022, RBI published a Discussion Paper on Climate Risk and Sustainable Finance, acknowledging the imperative for regulatory intervention to address environmental and climate risks.
Key Extract: “Banks are subject to climate risks through carbon-intensive sectors’ credit exposures. They need to incorporate environmental risk into risk management systems.” – RBI, 2022, But these are advisory and not having the force of law or inviting penalties for non-fulfillment.
The Proof: Evidence: Actual Examples of Green Banking in Action in India
Although green banking is not legally required in India, various banks and financial institutions have begun doing so voluntarily. Although these measures are not imposed by law, they indicate that the banking industry does have the capability and potential to make contributions towards environmental sustainability. Let’s consider a few actual and practical examples of green banking in India and how banks are engaging in this area.
State Bank of India (SBI) – Pioneering Green Bonds: State Bank of India (SBI), which is India’s largest public sector bank, has taken proactive measures towards encouraging green finance. Green bonds are a type of special financial instrument dedicated to raising funds only for environmental and climate-related initiatives. The funds raised from these bonds were utilized in financing clean energy projects such as solar and wind power in India.
SBI has also become a part of international associations such as the Green Bond Principles and Climate Bonds Initiative, which enunciate worldwide standards of sustainable finance. By doing so, SBI demonstrated that an age-old bank funded by the government could make contemporary strides in combating climate change. But it must be noted that no legislation compelled SBI to issue green bonds. It did it voluntarily as part of its vision for long-term sustainability and maybe even to enhance its international reputation.
YES Bank – First Private Bank to Issue Green Bonds: YES Bank has made history in 2015 as it is the first private sector bank to issue green bonds in India. It raised ₹1,000 crore to fund renewable energy initiatives. The initiatives included solar, wind, and small hydropower plants. This was a big leap for the private banking sector in India.
YES Bank also came out with India’s first Sustainability Report, demonstrating transparency in how it handles its environmental footprint. The bank also pledged to achieve 5,000 megawatts of renewable energy financing. It also attended global summits such as COP21 in Paris, further building its reputation as a green-aware bank. Once more, all of these actions were done on a voluntary basis. There was no Indian banking or environmental law that necessitated YES Bank to invest in such projects. The actions of the bank were also motivated primarily by its own CSR policy, market image, and consistency with international sustainable development goals (SDGs).
HDFC Bank – Sustainable CSR Projects: HDFC Bank, India’s second-largest private bank, has also been actively involved in encouraging green practices through its Corporate Social Responsibility (CSR) division. For example, it has partnered with NGOs to provide solar power to remote villages that have no access to the grid electricity. These initiatives cut down on carbon emissions while also enhancing rural development.
The bank also finances electric vehicles (EV), providing loans at concessional interest rates to owners of electric two-wheelers and automobiles. This encourages cleaner transportation and furthers the thrust of the Indian government towards e-mobility. But all these green activities are not undertaken due to any penalty or legal regulation — they are either a part of CSR expenditure (mandated under the Companies Act, 2013) or undertaken for brand development and market leadership in green finance.
ICICI Bank – Digital and Paperless Banking: ICICI Bank has concentrated on the “internal greening” of banking activities. This involves a shift towards paperless banking through the encouragement of online services, mobile banking applications, e-statements, and digital onboarding of customers. Although this may appear to be a small gesture, the reduction in paper usage among millions of customers results in a significant positive environmental impact.
Apart from this, ICICI has also lent to environmental NGOs in the form of CSR initiatives and invested in climate-resilient agriculture practices. Again, these actions are not a requirement under any particular provision in Indian environmental law or RBI regulation. They are voluntary good practices induced by the Reserve Bank and SEBI, but banks have a choice of how much effort they would like to make.
Absence of Uniformity and Legal Pressure: Although these instances indicate some banks are seriously considering green initiatives, no standardized practice exists among all Indian banking associations. Most small and medium-scale banks lack the means or the incentive to imbibe green practices. As there is no mandatory law or regulatory compulsion, banks are not penalized for not considering environmental hazards while sanctioning loans. For instance, a bank is still able to finance a coal plant or a dirty chemical complex, and there is no legal responsibility unless the borrower is already breaking an obvious environmental regulation. It is at the bank’s discretion to monitor if a project is ecologically safe — and that introduces inconsistency and loopholes into environmental regulation.
Conclusion
India’s existing legal system does not make green banking a statutory legal obligation. No statutory obligation exists that requires banks to implement green behavior, reject funding for polluting firms, or include environmental risk within credit decisions.
India’s majority of green banking initiatives come under:
- CSR schemes under the Companies Act
- Voluntary adherence to RBI or SEBI regulations
- Reputational initiative to attract sustainable investors
While the judiciary has stretched environmental rights under Article 21 and recognized principles such as Polluter Pays and Precautionary Principle, these have not been implemented directly in banks or financial intermediaries yet. In contrast, international examples, particularly from China, the EU, and Bangladesh, indicate that green banking can also be a legally enforceable and regulated activity with tangible results. India needs to upgrade its regulatory and policy framework to acknowledge the special role of banks in environmental impacts. Incorporating green banking into regulatory requirements — and not merely as an exercise in brand-building — is the hour of need.
FAQ
- Is green banking mandatory in India?: No, there is no central legislation or binding rule that makes green banking compulsory in India. Existing guidelines are advisory in nature.
- Are there any penalties for banks that fund polluting projects?: Not at present. However, if it is proven that a bank knowingly financed illegal activities causing environmental damage, civil or reputational consequences may follow.
- Can courts hold banks responsible under environmental law?: Indian courts haven’t done so yet, but based on principles like the Polluter Pays Doctrine, the scope exists for future jurisprudence to include financial actors.
- What is the difference between green banking and CSR?: Green banking refers to environmental-friendly banking operations. CSR is a broader responsibility under the Companies Act, which may include green projects. CSR is voluntary in content, though mandatory in spending.
